A Value-based Client-firm Relationship: Part VI
Structuring an Alternative Fee
Each week via the In-House ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. ACC Value Challenge steering committee member Ken Grady, General Counsel and Secretary of Wolverine World Wide, offered to profile his selection and start-up process of launching a trademark portfolio management engagement with law firm Seyfarth Shaw. Ken's co-blogger is Lisa Damon, a member of Seyfarth's Executive Committee and leader of the firm's efforts to incorporate Lean Six Sigma into its business. If you're just tuning in, here is the background to this story.
The client side:
From Ken:
“Fee discussions” - that point in many outside counsel retentions where the will to act seems to disappear for many in the in-house bar. While I would like to say this is just my impression, I hear this far more often from outside counsel. (“I’m willing to do a value relationship structure, but when I suggest them the in-house attorneys hem and haw and then just go back to hourly billing.”)
Sometimes, I think in-house counsel perceive value relationships as difficult to structure. Our trademark project is big, has many parts, and isn’t a one-time deal. To me, it makes sense to spend time structuring the fee relationship. Most of our matters aren’t that way. They have limited duration, limited impact, and the amount at risk is less. The time needed to structure a value relationship (assuming we already work with the firm) is much less – minutes, hours to maybe days.
Back to the task at hand. Seyfarth has proposed a way to construct a baseline working from the information we shared with them. The baseline uses the volume of work prior to the shift (number of applications US, number outside the US, oppositions, etc.). We can use this information to form our starting point – what did it cost for a specific volume (not necessarily what it should have cost). One way to set the new fee relationship for year one of the relationship would be to:
- Adjust the baseline based on what we know about the business (that is, increase, decrease or the same amount of portfolio activity)
- Adjust that amount to account for improvements in the processes to handle the portfolio using lean activities we will undertake with Seyfarth
- Adjust that amount to build in whatever cost-sharing is appropriate for Seyfarth to get up-to-speed on our business as reflected in the portfolio
We then could agree on a base price to handle the portfolio work. We can gainshare on additional improvements – we get part of the benefit (lower costs) and Seyfarth gets part of the benefit (we don’t get 100% of the lower costs). We could add a topper fee: depending on performance against certain other metrics (e.g., increase in average mark value using the equation I showed in the last post), Seyfarth gets an additional payment for helping to drive the increased average mark value. We can take excluded services and put some or all of them under other value relationship structures. Finally, we can spread payments throughout the year in a way that works for both of us, for example, even payments each month or perhaps payments timed to take pressure off the business when its cash demands are highest. The result might look like this:
In other words, before the shift assume we paid $1,000,000 for a year of covered services. We anticipate 10% more activity, so we increase the base amount by 10%. We assume that we will improve the efficiency of the services delivered by 20%, so we reduce the baseline amount to $880,000 to reflect the lower amount of work. We then say that Wolverine and Seyfarth will split any savings beyond the 20% (50%/50% gainsharing). We give Seyfarth an incentive of 10% of the year’s fee if our metric (average value per mark) improves by some pre-determined percentage. Finally, we agree to pay the $880,000 baseline amount in 12 installments of $73,333. Any gainsharing and any topper fee are paid in lump sums after the year when we have the final metrics.
Next: More explanation:
The firm view:
From Lisa:
Ah, fees. Get the alignment right, your relationship sings. Business interests are intertwined and you are truly adding business value. Get it wrong, anything from regrets and hard feelings to a straight vendor/vendee interaction. If I had a wish in our new world, it would be to leave the vendor life as far behind as we can.
With some thought, the fee arrangement can get you out of vendor-land – Ken's plan is a perfect example. First, a step back. When we typically get asked to set an alternative fee, we are given (or ask for) historical data on legal spend. Sometimes we get detail (by matter), and sometimes it is simply portfolio numbers for the last few years. Many firms use that to price the work. Ken's post though hits a key issue – don't stop there. If you base your alternative fee on past history, you have missed the chance to drive efficiency and value, both in and out. In Ken's post, he talks about a 20% "efficiency improvement" built in to the fee structure. Smart. Then there is a gainsharing provision built in. Smarter still because now you are truly aligning interest. There are other ways to construct this model. Our friend and mentor, Jeff Carr is well known for the ACES model – which is a risk sharing model – at base, the firm is paid a portion of fees with the reminder in a "success fee" bucket. The alignment comes in defining the criteria. Same ideas — different approach.
With Ken's model, we have several key issues:
- How do we achieve the 20% efficiency improvement (cue lean six sigma)?
- How do we establish "value" for Wolverine?
- How do we, as the outside partner, help move Wolverine's business forward? (Other than buying shoes – talk about adding value, you should see my closet.)
The first nut to crack is the 20% efficiency improvement. It’s a big number and key to the overall fee structure. Better get it right. That is one of the ways that we used (and are using) Lean Six Sigma. We took a heavy dose of Lean thinking, added some Lean tools (like "voice of the client" - Lean calls it "voice of the customer", and root cause analysis) and lots of project management skills and began to focus on efficiency improvements in the way we worked. You'd be surprised (or maybe you wouldn't) how much improvement you can make if you bring a laser-focus to what the client wants and the way you work. Rework, multiple touches, wrong staffing and unclear expectations are just a few areas to attack.
Ken's structure incents us to work together, across the businesses on efficiency.
Next week: Fees continued but also, a window on what we are actually doing. Reality law continues.
